Case 3:16-cv JST Document 99 Filed 03/17/17 Page 1 of 30 UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF CALIFORNIA

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1 Case :-cv-0-jst Document Filed 0// Page of 0 0 Richard H. Klapper (pro hac vice) (klapperr@sullcrom.com) Broad Street New York, New York 00- Telephone: () - Facsimile: () -0 Brendan P. Cullen (SBN 0) (cullenb@sullcrom.com) 0 Embarcadero Road Palo Alto, California 0 Telephone: (0) -00 Facsimile: (0) -00 Christopher M. Viapiano (pro hac vice) (viapianoc@sullcrom.com) 00 New York Avenue, N.W., Suite 00 Washington, D.C. 000 Telephone: (0) - Facsimile: (0) -0 Gilbert R. Serota (SBN 0) (gilbert.serota@apks.com) ARNOLD & PORTER KAYE SCHOLER LLP Three Embarcadero Center San Francisco, California Telephone: () -0 Facsimile: () -00 Counsel for Nominal Defendant Wells Fargo & Company UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF CALIFORNIA IN RE WELLS FARGO & COMPANY SHAREHOLDER DERIVATIVE LITIGATION Lead Case No. :-cv-0-jst WELLS FARGO & COMPANY S NOTICE OF MOTION AND MOTION TO DISMISS THE CONSOLIDATED AMENDED VERIFIED STOCKHOLDER DERIVATIVE COMPLAINT FOR FAILURE TO ADEQUATELY PLEAD DEMAND FUTILITY; MEMORANDUM OF POINTS & AUTHORITIES IN SUPPORT The Honorable Jon S. Tigar Hearing: May, 0 at :00 p.m. NOTICE OF MOTION AND MOTION TO DISMISS FOR FAILURE TO PLEAD DEMAND FUTILITY, LEAD CASE NO. :-CV-0

2 Case :-cv-0-jst Document Filed 0// Page of 0 TO ALL PARTIES AND THEIR COUNSEL OF RECORD: PLEASE TAKE NOTICE that on May, 0, at :00 p.m., or as soon thereafter as the matter may be heard in the United States District Court for the Northern District of California, San Francisco Courthouse, Courtroom, located at 0 Golden Gate Avenue, San Francisco, California,, nominal defendant Wells Fargo & Company, through its undersigned counsel, will, and hereby does, move to dismiss the Consolidated Amended Verified Stockholder Derivative Complaint, pursuant to Rules (b)() and. of the Federal Rules of Civil Procedure for failure to make a pre-suit demand on Wells Fargo s Board of Directors or adequately to plead that the demand requirement was excused. This Motion is based on this Notice, the supporting Memorandum of Points and Authorities, the Declaration of Brendan P. Cullen filed concurrently herewith, the accompanying Request for Judicial Notice, the complete files and records in this action, and any additional material and arguments as may be considered in connection with the hearing. 0 DATED: March, 0 Respectfully submitted, /s Brendan P. Cullen Richard H. Klapper (pro hac vice) (klapperr@sullcrom.com) Broad Street New York, New York 00- Telephone: () - Facsimile: () -0 Brendan P. Cullen (SBN 0) (cullenb@sullcrom.com) 0 Embarcadero Road Palo Alto, California 0-0 Telephone: (0) -00 Facsimile: (0) -00 Christopher M. Viapiano (pro hac vice) (viapianoc@sullcrom.com) 00 New York Avenue, N.W., Suite 00 Washington, D.C. 000 Telephone: (0) - Facsimile: (0) -0 Counsel for Nominal Defendant Wells Fargo & Company NOTICE OF MOTION TO DISMISS FOR FAILURE TO PLEAD DEMAND FUTILITY, LEAD CASE NO. :-CV-0

3 Case :-cv-0-jst Document Filed 0// Page of 0 TABLE OF CONTENTS 0 Page PRELIMINARY STATEMENT... STATEMENT OF FACTS AND ALLEGATIONS OF THE COMPLAINT... STANDARD ON THIS DEMAND FUTILITY MOTION... ARGUMENT... I. PLAINTIFFS FAIL TO ALLEGE RED FLAGS THAT CONSTITUTE SCIENTER ESTABLISHING THAT THE DIRECTORS UTTERLY FAILED TO OVERSEE THE COMPANY.... II. III. A. Dismissal of Employees Does Not Raise an Inference of Corporate Control Failures.... B. The EthicsLine Allegations and Anecdotes of Retail Employee Misconduct Do Not Support Plaintiffs Claims for Intentional Breach of Fiduciary Duties.... C. News Media Reports Do Not Permit the Inference That There Was an Utter Failure of Oversight.... D. Lawsuits Stemming from the L.A. Times Article Similarly Do Not Suggest an Utter Failure of Oversight.... E. Regulatory Investigations Do Not Demonstrate the Absence of Internal Controls.... F. OCC Examinations Do Not Demonstrate the Absence of Internal Controls.... THE DIRECTORS DO NOT FACE A SUBSTANTIAL LIKELIHOOD OF LIABILITY FOR PLAINTIFFS PATTERN OF CONDUCT AND INTENTIONAL MISREPRESENTATION CLAIMS... PLAINTIFFS HAVE FAILED TO PLEAD THAT THE OUTSIDE DIRECTORS LACK INDEPENDENCE.... CONCLUSION... -i- MEMORANDUM OF POINTS & AUTHORITIES IN SUPPORT OF MOTION TO DISMISS, LEAD CASE NO. :-CV-0

4 Case :-cv-0-jst Document Filed 0// Page of 0 0 Federal Cases TABLE OF AUTHORITIES Page(s) In re Am. Apparel, Inc. 0 Deriv. S holder Litig., 0 WL 00 (C.D. Cal. Apr., 0)..., In re Autodesk, Inc., S holder Deriv. Litig., 00 WL (N.D. Cal. Dec., 00)... In re CNET Networks, Inc., F. Supp. d (N.D. Cal. 00)... In re Impax Labs., Inc. S holder Deriv. Litig., 0 WL (N.D. Cal. Sept., 0)..., In re Intel Corp. Deriv. Litig., F. Supp. d (D. Del. 00)... KBC Asset Mgmt. NV v. McNamara, 0 WL (D. Del. May, 0)... Maine State Ret. Sys. v. Countrywide Fin. Corp., 0 WL (C.D. Cal. May, 0)..., Pirelli Armstrong Tire Corp. Retiree Med. Benef. Trust v. Lundgren, F. Supp. d 0 (S.D.N.Y. 00)... 0 Rosenbloom v. Pyott, F.d (th Cir. 0)... Sec. & Exch. Comm n v. Bardman, 0 WL (N.D. Cal. Oct., 0)... In re Verisign, Inc. Deriv. Litig., F. Supp. d (N.D. Cal. 00)... Delaware Cases Aronson v. Lewis, A.d 0 (Del. )...,, Beam v. Stewart, A.d 0 (Del. 00)... Brehm v. Eisner, A.d (Del. 000)..., -ii- MEMORANDUM OF POINTS & AUTHORITIES IN SUPPORT OF MOTION TO DISMISS, LEAD CASE NO. :-CV-0

5 Case :-cv-0-jst Document Filed 0// Page of 0 0 In re Caremark Int l Inc. Deriv. Litig., A.d (Del. Ch. )... passim In re Citigroup Inc. S holder Deriv. Litig., A.d (Del. Ch. 00)..., 0 Desimone v. Barrows, A.d 0 (Del. Ch. 00)..., Gamco Asset Mgmt., Inc. v. iheartmedia, Inc., 0 WL 0 (Del. Ch. Nov., 0)... Grobow v. Perot, A.d 0 (Del. )... Guttman v. Huang, A.d (Del. Ch. 00)... Orman v. Cullman, A.d (Del. Ch. 00)... Rales v. Blasband, A.d (Del. )..., Rattner v. Bidzos, 00 WL (Del. Ch. Sept. 0, 00)..., Reiter v. Fairbank, 0 WL 0 (Del. Ch. Oct., 0)...,,, Ret. Sys. v. Pyott, A.d (Del. Ch. 0)... South v. Baker, A.d (Del. Ch. 0)... passim Stone v. Ritter, A.d (Del. 00)... passim In re Walt Disney Co. Deriv. Litig., A.d (Del. Ch. )... In re Walt Disney Co. Deriv. Litig., 0 A.d (Del. Ch. 00)..., Weiss v. Swanson, A.d (Del. Ch. 00)... Wood v. Baum, A.d (Del. 00)... -iii- MEMORANDUM OF POINTS & AUTHORITIES IN SUPPORT OF MOTION TO DISMISS, LEAD CASE NO. :-CV-0

6 Case :-cv-0-jst Document Filed 0// Page of 0 Other State Cases Apollo Capital Fund, LLC v. Roth Capital Partners, LLC, Cal. App. th (00)... Charter Twp. of Clinton Police & Fire Ret. Sys. v. Martin, Cal. App. th (0)... Villari v. Mozilo, 0 Cal. App. th 0 (0)... Statutes C.F.R U.S.C. cc(b)... Delaware General Corporation Law (b)() iv- MEMORANDUM OF POINTS & AUTHORITIES IN SUPPORT OF MOTION TO DISMISS, LEAD CASE NO. :-CV-0

7 Case :-cv-0-jst Document Filed 0// Page of 0 0 Nominal defendant Wells Fargo & Company ( Wells Fargo or the Company ) respectfully submits this Memorandum of Points and Authorities, together with the Declaration of Brendan P. Cullen ( Decl. ) and attached exhibits, in support of its motion to dismiss the Consolidated Amended Verified Stockholder Derivative Complaint (the Complaint ) for failure to plead demand futility. PRELIMINARY STATEMENT Shareholders can only pursue the claims of a Delaware corporation in extraordinary circumstances. This is not one of them. The Complaint is arrestingly lengthy, as complaints like it usually are. The Complaint demonstrates that the sales-practices issues that were the subject of Wells Fargo s settlements with the Office of the Comptroller of the Currency, the Consumer Financial Protection Bureau, and the City Attorney of Los Angeles have received a great deal of attention since September 0. This attention from other litigants or the press or regulators or some in Congress might well indicate that the sales-practices issues are serious or significant. It is irrelevant, however, to the question whether the corporation s claims arising from those issues if any may be asserted by the corporation (as directed by its Board of Directors) or by a shareholder. Delaware law which governs here because Wells Fargo is a Delaware corporation requires that, before Plaintiffs file suit asserting claims on behalf of the corporation, they make a demand on Wells Fargo s Board that it investigate and, if warranted, pursue the claims that Plaintiffs assert. Plaintiffs failed to make the required demand, alleging that the demand requirement should be excused as futile because a majority of Wells Fargo s Directors are disqualified from assessing any demand due to self-interest or lack of independence. Plaintiffs principally allege that a majority of Directors are disqualified because they face a substantial likelihood of liability for failing to monitor Wells Fargo. This theory of director liability is possibly the most difficult theory in corporation law upon which a plaintiff might hope to win a judgment. In re Caremark Int l Inc. Derivative Litig., A.d, (Del. Ch. ). Claims asserted under Caremark must meet an exceptionally high [pleading] burden. In re Am. Apparel, Inc. 0 Deriv. S holder Litig., 0 WL 00, at * (C.D. Cal. The Individual Defendants join this motion by way of separate joinders. Pursuant to an agreement among the parties, the Individual Defendants may present further motions addressing the adequacy of the Complaint s pleading of claims on bases other than demand futility, if necessary, following a decision on the threshold demand-futility issue. MEMORANDUM OF POINTS & AUTHORITIES IN SUPPORT OF MOTION TO DISMISS, LEAD CASE NO. :-CV-0

8 Case :-cv-0-jst Document Filed 0// Page of 0 0 Apr., 0). Plaintiffs were obliged to allege particularized facts demonstrating that each of at least eight of Wells Fargo s Directors knew that they were not discharging their fiduciary obligations. Stone v. Ritter, A.d, 0 (Del. 00). As then-vice Chancellor (now Chief Justice) Leo Strine, has written, director liability for failure to monitor require[s] a finding that the directors acted with the state of mind traditionally used to define the mindset of a disloyal director bad faith because their indolence was so persistent that it could not be ascribed to anything other than a knowing decision not to even try to make sure the corporation s officers had developed and were implementing a prudent approach to ensuring law compliance. Desimone v. Barrows, A.d 0, (Del. Ch. 00). The Complaint is long on dudgeon and profligate in its accusations of Director wrongdoing and knowledge. But it fails to allege particularized facts showing that the Directors knowingly breached their duties to Wells Fargo. The Complaint should be dismissed. STATEMENT OF FACTS AND ALLEGATIONS OF THE COMPLAINT Wells Fargo, a Delaware corporation headquartered in San Francisco (Compl. ), is one of the world s largest financial services firms. It offers retail, commercial and corporate banking services, primarily in the United States. (See Decl. Ex. O, at. ) Wells Fargo employs approximately one in every 00 working Americans, totaling more than 0,000 people in four divisions (Community Banking, Consumer Lending, Wealth and Investment Management, and Wholesale, Commercial and International Banking). (Id. at,.) The Community Banking division, in which the sales practices issues arose, employs approximately 0,000 people. (Decl. Ex E, at.) There are,00 Wells Fargo bank branches in the United States. (Decl. Ex. P.) If Wells Fargo were a city and its employees residents, it would be more populous than U.S. state capitals and would be the most populous city in U.S. states. (See Decl. Exs. Q, R.) In 0, Wells Fargo earned $. billion in revenues and $. billion in net income. (Decl. Ex. O, at 0.) On September, 0, the Consumer Financial Protection Bureau, the Office of the Exhibits discussed herein are public documents appropriate for judicial notice. See Sec. & Exch. Comm n v. Bardman, 0 WL, at * (N.D. Cal. Oct., 0) ( Matters of public record, including public filings made with the SEC, may be judicially noticed. ). Plaintiffs plead that the documents referenced in the Complaint set forth the facts establishing that demand is futile; thus, the Court should consider those documents in their entirety and in context. See Reiter v. Fairbank, 0 WL 0, at *- (Del. Ch. Oct., 0). -- MEMORANDUM OF POINTS & AUTHORITIES IN SUPPORT OF MOTION TO DISMISS, LEAD CASE NO. :-CV-0

9 Case :-cv-0-jst Document Filed 0// Page of 0 Comptroller of the Currency ( OCC ) and the Los Angeles City Attorney simultaneously announced settlements with Wells Fargo stemming from certain sales practices related to the unauthorized opening of customer accounts by certain of Wells Fargo s bank branch employees. (See Compl. -.) Wells Fargo entered into these settlements without admitting or denying wrongdoing. (Compl. & n..) Its former CEO, John Stumpf, testified before the Senate Banking Committee on September 0, 0, and before the House Financial Services Committee on September, 0, on matters related to the facts underlying these settlements. (Compl.,, 0,.) In the wake of the announcement, Wells Fargo s Board took numerous actions. On September, 0, the Board created an Oversight Committee of outside Directors (the Oversight Committee ) to conduct an independent investigation into the Company s retail banking sales practices and related matters. (Decl. Ex. F.) At the same time, defendant Tolstedt left the Company and Tolstedt and 0 Stumpf forfeited approximately $ million and $ million, respectively, in stock compensation. (Id.) On October, 0, Stumpf retired. (Decl. Ex. G, at.) The Board elected Sloan to the Board and appointed him as CEO, and elected Sanger as non-executive Chairman and Duke as non-executive Vice Chair. (Id.) The Board subsequently amended the Company s by-laws to require that the chair and vice chair roles be held by outside directors. (Decl. Ex. L, at.) Throughout the fourth quarter of 0 and first quarter of 0, Wells Fargo has filed disclosures with the SEC discussing its key actions with regard to sales practices, including the Board s investigation, the Board s termination of four Community Banking executives for cause in early 0, and the Board s decision not to pay bonuses to several senior executives for 0. (See Decl. Exs. F, H at -, I at -, M, N, O at.) Those filings contain in-depth reviews of the sales practices at issue and detail Wells Fargo s steps to identify unauthorized accounts and refund more than $ million to potentially affected customers. (Id.) On September, 0, the first derivative action was filed in California state court, followed quickly by similar derivative complaints filed in this Court and the San Francisco Superior Court, all alleging claims arising from Wells Fargo s sales practices. (Decl. Ex. J.) On February, 0, Plaintiffs filed the current Complaint, asserting causes of action against numerous defendants, including The Oversight Committee recently announced that it intends to disclose the findings of its investigation by April, 0. (Decl. Ex. M.) -- MEMORANDUM OF POINTS & AUTHORITIES IN SUPPORT OF MOTION TO DISMISS, LEAD CASE NO. :-CV-0

10 Case :-cv-0-jst Document Filed 0// Page of 0 all members of the Board at the time this action was instituted. (Compl. 0-.) The Complaint alleges causes of action for () breach of fiduciary duty; () unjust enrichment; () insider selling; () violation of Section (a) of the Exchange Act; () violation of Section (b) of the Exchange Act; () violation of Section 0(a) of the Exchange Act; () violation of Section (b) of the Exchange Act; () violation of California Corporations Code 0; () violation of California Corporations Code 0; () corporate waste; and () contribution and indemnification. (Compl. -.) The first, second, fourth, fifth, seventh, ninth and tenth causes of action are alleged against the Directors. (Id.) The Wells Fargo Board. At the time the first complaint was filed, Wells Fargo s Board had members: Baker, Chao, Chen, Dean, Duke, Engel, Hernandez, James, Milligan, Peña, Quigley, Sanger, Stumpf, Swenson and Vautrinot. (See Compl..) The Wells Fargo Board is composed of 0 individuals with extensive experience in banking, corporate governance and management, including a former governor of the Federal Reserve Board and former chairwoman of the American Bankers Association (Vice Chairwoman Duke), a business school dean emeritus (Milligan), the CEO emeritus of Deloitte (Quigley), a retired Major General and Commander of the United States Air Force (Vautrinot), and directors with extensive executive experience as CEOs and chairpersons of unaffiliated boards of directors for Fortune 00 firms. (Decl. Ex. B, at -.) Chairman Sanger is the former CEO and chairman of General Mills. (Id. at.) Two outside Directors joined the Board in 0 (Duke and Vautrinot). (Id. at,.) CEO Sloan, like his predecessor, Stumpf, is the only director employed by the Company. Nearly all of the allegations in the Complaint are focused on the Defendants who are or were members of Wells Fargo management. For much of the Complaint, Plaintiffs broadly lump the defendants together as Officer Defendants and Director Defendants to attempt to infer what a majority of Board members allegedly knew. (See, e.g., Compl. ( Because of their positions of control and authority as directors or officers of Wells Fargo, Defendants were able to and did, directly or indirectly, exercise control over the wrongful acts... ).) Plaintiffs note that Stumpf resigned from Wells Fargo after the filing of the action and was replaced by CEO Sloan before the filing of the present Complaint. (Compl. 0.) For purposes of demand futility, the focus is on the board of directors sitting at the time the complaint is filed. Rosenbloom v. Pyott, F.d, (th Cir. 0) (citation omitted). The current Board is made up of directors, including two newly elected outside directors, Peetz and Sargent. Chao resigned from the Board to serve as U.S. Secretary of Transportation. (Compl..) -- MEMORANDUM OF POINTS & AUTHORITIES IN SUPPORT OF MOTION TO DISMISS, LEAD CASE NO. :-CV-0

11 Case :-cv-0-jst Document Filed 0// Page of 0 0 Plaintiffs refer to and quote extensively from dozens of documents. Those documents set forth the following timeline of remedial actions taken by the Company: In 0, a dedicated team began to engage in proactive monitoring of data analytics, specifically for the purpose of rooting out sales practice violations. In 0, [Wells Fargo] began reducing sales goals that team members would need to qualify for incentive compensation. In 0, [Wells Fargo] created a new corporate-wide enterprise oversight for sales practices. In 0, [Wells Fargo] further revised [its] incentives compensation plans, to align pay with ethical performance. In 0, [the Company] added more enhancements to [its] training materials, further lowered goals, and began a series of town hall meetings, to re-enforce the importance of ethical leadership and always putting [its] customers first. (Decl. Ex. E, at ; see Compl., n..) Demand Futility Allegations. The Complaint includes some detailed allegations concerning improper sales practices including the number of employees dismissed for ethics violations, the number of accounts potentially affected and the details of certain investigations and lawsuits. Wells Fargo or its regulators have reported much of this information. What the Complaint fails to plead, however, are facts showing the interestedness and lack of independence of the Board. Instead, the Complaint merely repeatedly asserts that the Directors purportedly had knowledge of or involvement in improper sales practices. For example, Plaintiffs make the conclusory allegation that the Director Defendants knew of or recklessly disregarded myriad facts relating to [the] scheme (id. at ), but never set forth with specificity how any Director personally came to know about the alleged scheme or when or how a majority of Directors affirmatively adopted, implemented and condoned it. (Id. at.) Plaintiffs include numerous paragraphs as the basis to allege a pattern of conduct showing a wholesale abandonment of the Directors fiduciary duties, including (a) allowing retail bank employees to engage in the pervasive scheme, (b) allowing insiders to engage in insider selling while they knew of the alleged scheme, (c) perpetuating woefully inadequate controls which allowed the illicit accountcreation scheme to begin and persist for years, (d) causing Wells Fargo to file materially false and misleading SEC filings, (e) approving a share repurchase program through which Wells Fargo bought back millions of shares of stock at artificially inflated prices, (f) awarding inflated compensation packages to officers, and (g) concealing the illicit account-creation scheme. (Compl. -.) Notwithstanding the lengthy recitation of alleged wrongs, the Complaint does not allege when or how -- MEMORANDUM OF POINTS & AUTHORITIES IN SUPPORT OF MOTION TO DISMISS, LEAD CASE NO. :-CV-0

12 Case :-cv-0-jst Document Filed 0// Page of 0 the Directors came to know the things that Plaintiffs allege that they knew and other parts of the Complaint confirm that the allegations of Director knowledge are conclusory inferences. (See, e.g., Compl. (generalized claims of wrongdoing indicate the Directors scienter).) Finally, Plaintiffs allege that the five Directors on the Human Resources Committee lack independence because they knew or recklessly disregarded that they were approving the Officer Defendants compensation in a manner that was not a valid exercise of business judgment. (Compl..) Plaintiffs further allege that the Human Resources Committee abdicat[ed] its responsibility with respect to clawbacks of compensation from Stumpf and Tolstedt because it only agreed with Stumpf s recommendation that he forfeit all of his outstanding unvested equity awards, as well as his 0 bonus and salary, rather than firing him for cause (to the same effect). (Compl. -.) STANDARD ON THIS DEMAND FUTILITY MOTION The requirement that a shareholder make a demand on a company s board of directors before bringing claims that belong to the Company is a cornerstone of Delaware corporate law, derived from the cardinal precept that directors, rather than shareholders, manage the business and affairs of the corporation. Aronson v. Lewis, A.d 0, (Del. ). The demand requirement exists to 0 insure that a stockholder exhausts his intracorporate remedies and provide[s] a safeguard against strike suits. Id. at -. The hurdle of proving demand futility serves an important policy function of promoting internal resolution, as opposed to litigation, of corporate disputes and grants the corporation a degree of control over any litigation brought for its benefit. Rattner v. Bidzos, 00 WL, at * (Del. Ch. Sept. 0, 00). This case provides an excellent example of the wisdom of this rule. According to Plaintiffs, Wells Fargo faces a crisis related to the sales-practices issues, involving litigations in multiple fora and investigations by numerous regulators and Congressional committees. (Compl. 0.) The Company s responses to the numerous issues that have arisen from this situation require weighing a vast number of considerations and the views of many constituencies regulators, shareholders, customers, potential customers, employees, and potential employees, to name Delaware law applies to the determination whether Plaintiffs have pled demand futility adequately because Wells Fargo is a Delaware corporation. See Charter Twp. of Clinton Police & Fire Ret. Sys. v. Martin, Cal. App. th, - (0); Villari v. Mozilo, 0 Cal. App. th 0, n. (0) ( Delaware substantive law applies in this case pursuant to the internal affairs doctrine... which provides that the law of the place of incorporation governs the liability of directors to the corporation and its shareholders. ). -- MEMORANDUM OF POINTS & AUTHORITIES IN SUPPORT OF MOTION TO DISMISS, LEAD CASE NO. :-CV-0

13 Case :-cv-0-jst Document Filed 0// Page of 0 just a few. Many of these same considerations would or should weigh on the decision whether, when, and how Wells Fargo will pursue any claims of its own that arise from the sales-practices issues. Plaintiffs whose only stake in the outcome of this litigation is the stock of Wells Fargo that they own and who do not have to answer to (or worry about) any Wells Fargo regulator, customer, or employee seek to take over this decision and displace the collective judgment of the highly experienced members of the Board. To establish that this case is the rare one in which demand is excused, Plaintiffs must plead with particularity either that a majority of the Board (here, eight of Directors) was interested in the outcome of the claims at issue, or that a majority is insufficiently independent with respect to a decision on whether to bring suit. Rales v. Blasband, A.d, (Del. ). Interestedness. As relevant here, a plaintiff can plead interestedness on the part of a board by pleading particularized facts showing that the directors face a substantial likelihood of personal liability, such that their ability to consider a demand impartially is compromised. Rattner, 00 WL, at * (quoting Guttman v. Huang, A.d, 0 (Del. Ch. 00) (internal quotations omitted)); see also South v. Baker, A.d, - (Del. Ch. 0) (holding that a stockholder must plead facts establishing a sufficient connection between the corporate trauma and the board such that at least half of the directors face a substantial likelihood of personal liability ). A substantial 0 likelihood of liability is not a mere threat of liability. See Rales, A.d at. Plaintiffs cannot establish a disqualifying interest simply by naming a director as a defendant or even by alleging that the director approved the transaction or decision at issue. See Brehm v. Eisner, A.d, n. (Del. 000). Plaintiffs cannot displace the board s authority [over the corporation s claims] simply by describing the calamity and alleging that it occurred on the directors watch. South, A.d at - (quoting La. Mun. Police Empls. Ret. Sys. v. Pyott, A.d, 0 (Del. Ch. 0), rev d on other The Complaint comes nowhere close to establishing that any Director, much less a majority of the Directors, faces a substantial likelihood of liability. For the sake of simplicity, references to Director(s), where not otherwise specified, refer to outside Directors. Plaintiffs do not appear to have attempted this, but director interestedness also can be pled with particularized facts showing that the wrongdoing at issue resulted in a director receiving a material personal financial benefit... not equally shared by the stockholders, Rales, A.d at (citation omitted), and that the benefit is significant enough to have made it improbable that the director could perform her fiduciary duties to the... shareholders without being influenced by her overriding personal interest. Orman v. Cullman, A.d, (Del. Ch. 00) (citation omitted). -- MEMORANDUM OF POINTS & AUTHORITIES IN SUPPORT OF MOTION TO DISMISS, LEAD CASE NO. :-CV-0

14 Case :-cv-0-jst Document Filed 0// Page of 0 0 grounds, A.d (Del. 0)). The facts showing that a director faces a substantial likelihood of personal liability must be pled with particularity. See Aronson, A.d at -. Generalized, non-specific allegations fail to meet this burden. Desimone, A.d at. Further, Plaintiffs must plead facts specific to each director, demonstrating that at least half of them could not have exercised disinterested business judgment in responding to a demand. Id. (emphasis added). The typical plaintiff attempting to plead that his or her failure to make a demand was excused as futile faces a nearly insurmountable hurdle. The hurdle here is higher still. First, pursuant to Delaware General Corporation Law (b)(), Wells Fargo s charter exculpates its Directors from liability for breaches of fiduciary duty, except as to acts taken in bad faith or intentional misconduct. (Decl. Ex. P, at.) Accordingly, the Directors face no likelihood of personal liability for negligence or any nonintentional breach of their duty of care. In the face of this exculpatory clause, Plaintiffs can only plead the requisite substantial likelihood of personal liability if they can allege with particularity actual director involvement in a decision or series of decisions that violated positive law, such that the Directors knowingly breached their fiduciary duties, or that the Directors consciously failed to act after learning about evidence of illegality through a red flag. South, A.d at ; see also In re Autodesk, Inc., S holder Deriv. Litig., 00 WL, at * (N.D. Cal. Dec., 00) (where corporation has adopted an exculpatory provision under Delaware law, liability is foreclosed for all but the most egregious breaches of duty self-dealing [ ] and intentional bad faith ). Second, the thrust of Plaintiffs demand futility allegations is that the Directors face a substantial likelihood of liability for failing to exercise oversight over Wells Fargo. (See, e.g., Compl.,,,,,,,.) The only such claims that exist under Delaware law are Caremark claims. Caremark, A.d at. Delaware courts describe the Caremark failure to monitor claim as possibly the most difficult theory in corporation law upon which a plaintiff might hope to win a judgment, Caremark, A.d at ; Stone, A.d at, and make clear that it is viable only when there the directors acted with the state of mind traditionally used to define the mindset of a disloyal director bad faith. Desimone, A.d at. -- MEMORANDUM OF POINTS & AUTHORITIES IN SUPPORT OF MOTION TO DISMISS, LEAD CASE NO. :-CV-0

15 Case :-cv-0-jst Document Filed 0// Page of 0 0 A Caremark claim can be pled by alleging particularized facts demonstrating either (a) the directors utterly failed to implement any reporting or information system or controls; or (b) having implemented such a system or controls, consciously failed to monitor or oversee its operations thus disabling themselves from being informed of risks or problems requiring their attention. In either case, imposition of liability requires a showing that the directors knew that they were not discharging their fiduciary obligations. Stone, A.d at 0 (emphases added). It is not entirely clear, but Plaintiffs appear to allege the second sort of Caremark failing the failure to monitor. Plaintiffs can plead a Caremark claim only if they allege that the Board consciously failed to monitor Wells Fargo s systems and controls to such an extent that they knew that they were not discharging their fiduciary obligations. Id. at. Merely pleading that Wells Fargo officers and employees have misbehaved will not satisfy this obligation. Delaware courts have long recognized that most of the decisions that a corporation, acting through its human agents, makes are, of course, not the subject of director attention. Id. (quoting Caremark, A.d at ). [O]rdinary business decisions that are made by officers and employees deeper in the interior of the organization can... vitally affect the welfare of the corporation and its ability to achieve its various strategic and financial goals. Caremark, A.d at. Thus, directors good faith exercise of oversight responsibility may not invariably prevent employees from violating criminal laws, or from causing the corporation to incur significant financial liability, or both[.] Stone, A.d at. Because of the exculpatory clause and because Plaintiffs bring Caremark claims, the only way that Plaintiffs can adequately plead that a majority of the Directors face a substantial likelihood of personal liability is to allege specific facts establishing that each Director acted with scienter, i.e. that they had actual or constructive knowledge that their conduct was legally improper, In re Citigroup Inc. S holder Deriv. Litig., A.d, (Del. Ch. 00) (citing Wood v. Baum, A.d, (Del. 00)), or, as to the waste claim, bad faith, which is very rarely found. In re Walt Disney Co. Derivative Litig., 0 A.d, (Del. Ch. 00), aff d, 0 A.d (Del. 00). Independence. A director is not independent for purposes of assessing demand futility if he is beholden to the subject of the claims such that the director is unable to base his decisions on the corporate merits of the subject before the board rather than extraneous considerations or influences. -- MEMORANDUM OF POINTS & AUTHORITIES IN SUPPORT OF MOTION TO DISMISS, LEAD CASE NO. :-CV-0

16 Case :-cv-0-jst Document Filed 0// Page of 0 0 Rales, A.d at (quoting Aronson, A.d at ). Directors who are family members of senior executives or are themselves employees of a corporation are prototypical examples of those who lack independence. See id. at -. Plaintiffs can plead lack of independence only by alleging particularized facts sufficient to create a reasonable doubt that most Directors are incapable of acting independently. Id. at. ARGUMENT Plaintiffs allege that demand is futile for three primary reasons: (a) the Directors face liability for their awareness or conscious disregard of significant red flags concerning the sufficiency of Wells Fargo s internal controls (Compl. -), (b) they face liability for decisions that evidence a pattern of conduct showing a wholesale abandonment of the Director Defendants duties (Compl. -), and (c) they lack independence from Stumpf because they approved his excessive compensation. (Compl. -.) None of these allegations satisfies Delaware s exacting demandfutility pleading standard. I. PLAINTIFFS FAIL TO ALLEGE RED FLAGS THAT CONSTITUTE SCIENTER ESTABLISHING THAT THE DIRECTORS UTTERLY FAILED TO OVERSEE THE COMPANY. Plaintiffs do not plead a factual basis for the conclusion that any Director let alone a majority of Directors knew that they were failing in their oversight responsibilities. The Complaint alleges six types of information supposedly known to the Board: (i) the Board had to have known of the dismissal of,00 employees (Compl. 0, ); (ii) certain committees received high-level information concerning inquiries to the Company s EthicsLine reporting system (see Compl.,, 0); (iii) a December 0 L.A. Times article on the Community Bank s sales practices was discussed with the Board (Compl., ); (iv) the Board was confronted with additional red flags of misconduct when the L.A. City Attorney initiated a lawsuit in May 0, accompanied by a consumer class action (Compl., ); (v) several regulators investigated unauthorized accounts Several of Plaintiffs causes of action (e.g., for unjust enrichment, waste and mismanagement) do not independently give rise to a substantial likelihood of Director liability because they are merely duplicative. Gamco Asset Mgmt., Inc. v. iheartmedia, Inc., 0 WL 0, at * (Del. Ch. Nov., 0) (dismissing duplicative unjust enrichment claims following dismissal of fiduciary duty claims because unjust enrichment claim depends per force on the breach of fiduciary duty claim ); Disney, 0 A.d at ; see also Citigroup, A.d at ( Delaware law does not recognize an independent cause of action against corporate directors and officers for reckless and gross mismanagement; such claims are treated as claims for breach of fiduciary duty. ). -- MEMORANDUM OF POINTS & AUTHORITIES IN SUPPORT OF MOTION TO DISMISS, LEAD CASE NO. :-CV-0

17 Case :-cv-0-jst Document Filed 0// Page of 0 0 at various times in the past five years (Compl. -, 0); and (vi) the OCC identified sales practices as matters requiring attention through its examination of Wells Fargo Bank, N.A. in 0 (Compl. 0, et seq.). None of these allegations suffice to plead scienter these allegations never supply the who, what, when, where and how sorts of facts that demonstrate that and how any Director, let alone a majority of Directors, came to have knowledge of systemic wrongdoing by Wells Fargo officers or employees. See South, A.d at (dismissing case because the complaint nowhere alleges anything that the directors were told about the incidents, [or] what the Board s response was[.] ). Plaintiffs catalogue reported misconduct by retail banking employees, but that alone cannot establish what the Directors knew about that misconduct or when they knew it. KBC Asset Mgmt. NV v. McNamara, 0 WL, at * (D. Del. May, 0) (finding insufficient Complaint [that] alleges a number of bad facts, but fails to provide a basis for inferring that the requisite number of Board members were aware of the alleged red flags[.] ); Reiter, 0 WL 0, at *- (rejecting claims, in bank derivative action, that regulatory investigations and lawsuits constituted red flags ). A. Dismissal of Employees Does Not Raise an Inference of Corporate Control Failures. Plaintiffs allege, no fewer than seven times, that a glaring red flag to Defendants consisted of the termination, over the span of five years, of more than,00 Wells Fargo employees for conduct relating to the illicit account-creation scheme. (Compl. (emphasis in original), see also id.,, 0, 0,,, 0.) The Complaint, however, nowhere alleges that this information was provided to the Directors before September 0, let alone whether it, or why it would have, struck the Directors as significant. Context is critical. In a bank with,00 branches, this allegation means that, on average and over roughly a five-year period, fewer than one employee per Wells Fargo branch was terminated for sales-practice-related issues. Perhaps more importantly, the allegation involves terminated employees as best as can be determined from their allegations, Plaintiffs allege that employees engaged in misconduct that the Company s controls detected and that those employees received the ultimate sanction that an employer can mete out: they were dismissed. Had this information been provided to the Directors (which, again, Plaintiffs do not allege), it might well have communicated to the Directors that the controls in place were functioning properly and that the -- MEMORANDUM OF POINTS & AUTHORITIES IN SUPPORT OF MOTION TO DISMISS, LEAD CASE NO. :-CV-0

18 Case :-cv-0-jst Document Filed 0// Page of 0 0 Company was taking misconduct seriously when it discovered it. Because Plaintiffs fail to allege that this information in any form was ever provided to the Directors prior to September 0, it does not assist them in pleading that any Director consciously failed to act after learning about evidence of illegality. South, A.d at ; see In re Impax Labs., Inc. S holder Deriv. Litig., 0 WL, at * (N.D. Cal. Sept., 0) ( The lacuna in the plaintiffs argument is a failure to recognize that the directors good faith exercise of oversight responsibility may not invariably prevent employees from [causing harm to the corporation]. ) (quoting Stone, A.d at ). B. The EthicsLine Allegations and Anecdotes of Retail Employee Misconduct Do Not Support Plaintiffs Claims for Intentional Breach of Fiduciary Duties. Plaintiffs focus heavily on employee calls to Wells Fargo s EthicsLine and a handful of communications from current or former employees over a period of several years as evidence of the Board s knowledge of systemic internal control failures. (See, e.g., Compl. -,,, -.) Handful may be an overstatement: Plaintiffs allege one letter from 00 (nine years before this lawsuit was filed); two s in 0; and a letter and s from a single employee in 0. (Id.,,.) Only the 0 letter and s are alleged to have been sent to the Board, and even then, they are not alleged to have been sent to the individual Board members but to an address of unalleged ownership (BoardCommunications@wellsfargo.com) that Plaintiffs do not allege is a direct line to Wells Fargo s Directors. (Id., 0.) The existence of four employee complaints over a nine-year period in an organization as large as Wells Fargo hardly evidences the sort of systemic failure of controls that Plaintiffs must plead to support a failure of oversight claim. Indeed, the allegations concerning the communications in 0 (which were not alleged to have been provided to the Board) sandwich the allegation that, in 0, [n]early,000 employees in the Company s retail banking To put these dismissals in further context, over the period from 0 through 0, between.% and.% of employees in the U.S. financial services sector were involuntarily discharged each year (either terminated or laid off). (See Decl. Ex. C.) Plaintiffs allege sales-practices-related terminations that amount to approximately % of Wells Fargo s Community Banking personnel and less than 0.% of Wells Fargo s total personnel per year over the period 0 to 0. Without a great deal more, that does not constitute a red flag under Delaware law (though, again, Plaintiffs do not even allege that the Directors were made aware of these terminations in the first place). The 00 letter is alleged to have been provided to the Audit and Examination Committee, though Plaintiff does not allege what current Directors served on that committee at that time (id. ) and, notably, only one current member of the Audit and Examination Committee was even on the Board in 00. (See id. -0.) -- MEMORANDUM OF POINTS & AUTHORITIES IN SUPPORT OF MOTION TO DISMISS, LEAD CASE NO. :-CV-0

19 Case :-cv-0-jst Document Filed 0// Page of 0 0 sector were terminated for improper sales practices. (Id..) These allegations show at most that Wells Fargo s control functions detected and dealt with the problems Plaintiffs complain about it is not evidence that the Board was aware that a significant problem existed that Wells Fargo s controls were not addressing. Several of these accounts are taken from pleadings in five employment litigations by former employees alleging wrongful dismissal by the Company over the period from 00 to 0. (See id. -,,, -.) Courts routinely reject unproven allegations in other litigations as an adequate basis on which to state a claim even under less demanding pleading standards than the one Plaintiffs must meet. Maine State Ret. Sys. v. Countrywide Fin. Corp., 0 WL, at * (C.D. Cal. May, 0) (striking allegations taken from other complaints [b]ecause Plaintiffs have not reasonably investigated the allegations they copied from complaints in other cases ). Even meritorious allegations in a single lawsuit brought by a single employee or even several employees are highly unlikely ever to make their way to a single member of Wells Fargo s Board (Plaintiffs do not allege that any of the complaints that they reference did). This is easy to understand Wells Fargo, like most large companies that are also large employers, is named as a defendant in thousands of lawsuits every year. If Wells Fargo s Directors undertook to read all of those complaints as they were filed, they would do nothing else. The Complaint goes on to allege that certain teams within the Company were charged with implementing proactive monitoring of data analytics, specifically for the purpose of rooting out sales practice violations and that those controls identified simulated funding activity in the Los Angeles and Orange County markets, and [that the Company] terminated Wells Fargo employees for that conduct. (Compl..) This allegation alone may be enough to require dismissal of the Complaint it establishes that Wells Fargo implemented precisely those types of monitoring systems that Plaintiffs, if they are to be successful, must allege with particularity did not exist or were ignored. Here, the complaint alleges that Wells Fargo adopted systems and controls that succeeded in detecting Decl. Exhibit T is a table showing the results of a search in the PACER database of federal civil court cases for instances in which Wells Fargo was named as a defendant for the period 0 to when the first derivative complaint was filed in federal court on September, 0: more than,00 cases. If the Directors were to read one of these complaints which do not include the thousands of lawsuits filed in state courts over the same period every single day of the year, they would get through them all in years. -- MEMORANDUM OF POINTS & AUTHORITIES IN SUPPORT OF MOTION TO DISMISS, LEAD CASE NO. :-CV-0

20 Case :-cv-0-jst Document Filed 0// Page 0 of 0 0 wrongdoing, which wrongdoing was punished as severely as Wells Fargo could punish it. This is the opposite of a failure to monitor. See, e.g., South, A.d at ( These pled facts do not support an inference of an utter failure to attempt to assure a reasonable information and reporting system exists, but rather the opposite: an evident effort to establish a reasonable system.... The complaint thus refutes the assertion that the directors utterly failed to attempt to fulfill their oversight obligations. ) (citing and quoting Caremark, A.d at, and Stone, A.d at ). The fact that these systems were in place and that the Directors received high-level reports on ethics monitoring (Compl., 0) suggests an evident effort to establish a reasonable system, not the opposite. Delaware courts have long recognized that most of the decisions that a corporation, acting through its human agents, makes are, of course, not the subject of director attention. Stone, A.d at (quoting Caremark, A.d at ); Impax Labs, 0 WL, at * (plaintiffs failed to plead demand futility because the directors good faith exercise of oversight responsibility may not invariably prevent employees from [causing harm to the corporation]. ) (quoting Stone, A.d at ). A more appropriate inference is that the Board leaves individual ethics and related employment cases to management and counsel, who are equipped to handle those individual issues in a manner that the Board is not. The allegation that the Board knew of alleged systemic and extraordinary sales practice abuses based on these anecdotal reports is an unsupported conclusion. C. News Media Reports Do Not Permit the Inference That There Was an Utter Failure of Oversight. Plaintiffs allegations concerning a December 0 L.A. Times article on the sales practices in the Company s Community Banking division also do not support their allegations of scienter. First, as a factual matter, Plaintiffs rendition of that article elides much that is pertinent to the demand-futility analysis. They allege that it unquestionably alerted Defendants that those [improper sales] activities were pervasive and stemmed from the culture. (Compl. 0.) The article reports that Wells Fargo had previously dismissed 0-some employees and disciplined others for ethics violations in Southern The similar allegations that the Board, from 0 to 0, would get reports at a Committee level, at a high-level about [EthicsLine requests], or information at not a granular but maybe at the company level (Compl., 0), and that the certain committees received reports from management that it was monitoring sales integrity in Community Banking does not suggest a bad faith failure to monitor. (Id. 0.) Again, it shows the opposite. See South, A.d at. -- MEMORANDUM OF POINTS & AUTHORITIES IN SUPPORT OF MOTION TO DISMISS, LEAD CASE NO. :-CV-0

21 Case :-cv-0-jst Document Filed 0// Page of 0 0 California branches. (Decl. Ex. A.) To the extent there was a problem in that region, the article indicates that management had detected and had dealt with it in the most serious way that a company can discipline employees: dismissal. Second, the L.A. Times article quotes a Wells Fargo spokesman who discussed the bank s security procedures to root out employees who violate laws or bank ethics policy because [t]his is something [Wells Fargo] take[s] very seriously and [w]hen we find lapses, we do something about it, including firing people. (Id.) The article further reported that Wells Fargo, which had acquired Wachovia Bank during the financial crisis, was still dealing with integration issues among 0 lines of business, had undertaken a process to ensure that its ethics policies are consistent across those many business lines and had launched an Ethics Program Office to review standards for employees and handling of conflicts of interest. (Id.) Plaintiffs plead no basis to disbelieve any of these assurances (having ignored them in describing the article). None of this suggests that Wells Fargo had no controls or that the Board knowingly failed to monitor the controls that it had to the contrary, and once again, it suggests an evident effort to establish a reasonable system. South, A.d at (citing Caremark, A.d at ). D. Lawsuits Stemming from the L.A. Times Article Similarly Do Not Suggest an Utter Failure of Oversight. Plaintiffs next allege that the Board was confronted with additional red flags of misconduct when the L.A. City Attorney initiated a lawsuit in May 0, followed days later by a consumer class action in the Northern District. (Compl.,,.) The complaints initiating those suits alleged what Plaintiffs term gaming several forms of alleged sales practice abuses. (Id.) Those complaints contain still more unproven allegations from other litigations that the Court should disregard for purposes of assessing whether Plaintiffs have met their pleading burden. Maine State Ret. Sys., 0 WL, at *. The Complaint alleges that [t]he Board was aware of the[se] litigations and investigations, though this appears to be based only upon Plaintiffs allegation that the Audit and Examination Committee and the Corporate Responsibility Committee were expressly responsible for tracking, overseeing, and addressing those proceedings and the issues from which they arose. (Compl..) This is inadequate under Delaware law. Mere membership on a committee or board, without specific allegations as to defendants roles and conduct, is insufficient to support a -- MEMORANDUM OF POINTS & AUTHORITIES IN SUPPORT OF MOTION TO DISMISS, LEAD CASE NO. :-CV-0

22 Case :-cv-0-jst Document Filed 0// Page of 0 finding that directors were conflicted. In re CNET Networks, Inc., F. Supp. d, (N.D. Cal. 00) (citation omitted); South, A.d at ( As numerous Delaware decisions make clear, an allegation that the underlying cause of a corporate trauma falls within the delegated authority of a board committee does not support an inference that the directors on that committee knew of and consciously disregarded the problem for purposes of Rule.. ). But even if Plaintiffs had alleged that the Directors were aware of the L.A. City Attorney s lawsuit, they would have failed to plead that this indicates that they knowingly breached their oversight obligations. As the Complaint and the documents it references make clear, up to and including in 0, Wells Fargo took numerous actions to address the issues described in the L.A. City Attorney complaint. The unproven allegations of the L.A. City Attorney s complaint were they provided to 0 the Board likely would have communicated only that these efforts were important and needed to continue. The Chancery Court s decision this past October in Reiter is instructive. That case involved derivative litigation brought against Capital One s directors concerning litigation and regulatory reviews alleging insufficient anti-money-laundering ( AML ) controls at Capital One. Reiter, 0 WL 0, at *. Chancellor Bouchard analyzed similar claims as those alleged here and found them wanting: [T]he allegations of the Complaint and the documents incorporated therein would allow reasonable minds to argue either side of a debate over whether the directors oversight of the Company s [AML] compliance program was sufficiently robust or flawed. But what those allegations do not reasonably permit [ ] is an inference that the defendants consciously allowed Capital One to violate the law so as to sustain a finding they acted in bad faith. As such, plaintiff has failed to plead with particularity that a majority of Capital One s tenmember board acted in such an egregious manner that they would face a substantial likelihood of liability for breaching their fiduciary duty of loyalty so as to disqualify them from applying disinterested and independent consideration to a stockholder demand. Id. at (emphasis in original). E. Regulatory Investigations Do Not Demonstrate the Absence of Internal Controls. Plaintiffs next set of allegations is that regulators investigated sales practices issues at various times between 0 and 0. (Compl. -, 0.) These allegations, like the others, do not (See Decl. Ex. E, at : In 0, [Wells Fargo] created a new corporate-wide enterprise oversight for sales practices. In 0, [Wells Fargo] further revised [its] incentives compensation plans, to align pay with ethical performance. In 0, [the Company] added more enhancements to [its] training materials, further lowered goals, and began a series of town hall meetings, to re-enforce the importance of ethical leadership[.] ) -- MEMORANDUM OF POINTS & AUTHORITIES IN SUPPORT OF MOTION TO DISMISS, LEAD CASE NO. :-CV-0